Overview of Controlled Group
Rules and Retirement Plans
Final regulations under § 414(c) were issued in 2007
(with a 2009 plan year effective date) regarding rules for
certain tax exempt entities.
Importance
Plans Impacted
This white paper applies to entities sponsoring tax
qualified defined benefit and defined contribution
retirement plans under § 401(a) and certain tax exempt
entities sponsoring § 401(a) or § 403(b) plans.
Identifying the employer is critical for retirement plans.
When a controlled group exists, all employees of all the
employers are considered/treated as working for a single
employer for key Code provisions – including coverage,
nondiscrimination and top heavy tests, as well as the
History
Highly Compensated Employee determinations.
Controlled group provisions were added to the Internal
Definition and Types of Controlled Groups
Revenue Code (“Code”) in 1964 with the intention of
providing tax incentives for small businesses operating
as corporate entities. Code §§ 414(b) and (c) were added
to the Code at the time the Employee Retirement Income
Security Act of 1974 (“ERISA”) was enacted. This was
A controlled group is a combination of two or more
corporations and/or unincorporated businesses that are
under common control as defined in Code § 1563, and it
includes ownership tests to determine if a controlled
group situation exists.
done to correct a problem with certain medium and large
size employers who took advantage of lower tax rates by
If a controlled group exists, the employees of the
organizing their corporate structures into multiple
employers within these groups are considered as
corporate entities. These additional provisions added a
employed by one single employer for certain Code
requirement that all employees of commonly controlled
sections. See our section, Controlled Groups and
corporations, trades or businesses be treated as
Qualified Plans for details.
employees of a single corporation, trade or business.
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The three types of controlled groups include parent-
Company B and Ann owns 70% of Company B.
subsidiary, brother-sister or a combination of these two
They meet the controlling interest requirement for
groups.
both companies because their combined ownership

of each company is 80%. However, they do not meet
A parent-subsidiary controlled group exists when a
the 50% threshold for effective control. Ann only
“parent” business owns more chains of corporations
owns 10% of Company A, so her identical common
connected through stock ownership with a common
percentage of Company B is only 10%. Tom only
parent corporation if:
(A)
owns 10% of Company B, so his identical common
80% of the stock of each corporation, other
percentage for Company A is only 10%. For each
than the common parent corporation, is owned
company, their combined common ownership
by one or more of the other corporations; and
(B)
percentage is only 20%. Since the effective control
the common parent corporation owns at least
requirement is not met, this would not be a brother-
80% of the stock of at least one of the other
sister controlled group.
corporations.


A combined controlled group consists of three or
A brother-sister controlled group exists when a
more organizations where:
group of two or more corporations in which five or
(A)
each organization is a member of either a
fewer common owners own directly or indirectly a
parent-subsidiary or a brother-sister
“controlling interest” of each group, and have
controlled group; and
“effective control”. A common owner must be an
(B)
individual, a trust, or an estate. The term “persons”
at least one corporation is the common parent
of a parent-subsidiary controlled group and
includes individuals, estates or trusts. It does not
that parent is also a member of a brother-sister
include corporations.
controlled group.
Controlling interest generally means 80% or more of
Ownership is based on the type of business. For a
the stock of each corporation. Effective control is
corporation, determining ownership is based on the
more complicated, and generally means ownership
percentage of company’s stock owned. The ownership
of more than 50% of the stock of each corporation.
percentage is based on voting power or value of the
However, in determining the ownership percentage
stock. For a sole proprietorship, the sole proprietor is
for each owner, you have to look at each company
treated as the 100% owner. For a trust or estate,
he owns and determine an identical common
ownership is based on the actuarial value of the estate or
ownership percentage for each corporation.
trust.
Example: Tom owns 70% of Company A and Ann
owns 10% of Company A. Tom owns 10% of
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Overlapping Groups
Attribution Rules
If a corporation is a member of more than one controlled
Attribution is the concept of treating a person as owning
group with respect to any taxable year, the corporation is
an interest in a business that is not actually owned by
treated as a member of only one controlled group for tax
that person. Attribution may result from family or
purposes.
business relationships. Code § 1563 contains the rule of
attribution used to determine control for a controlled
Generally, if on December 31 a corporation is a member
group of corporations (§ 414(b)), or for trades or
of a controlled group by possessing at least 80% of the
businesses – whether or not incorporated – which are
total value of shares of all classes of stock of the
under common control (§ 414(c)). It is not our intent to
corporation, and if on that same date the corporation is
discuss attribution rules in detail in this white paper, but
also a member of another controlled group by owning
we wanted to note that these rules also come into play.
other stock that is not used to satisfy the 80% total value
test, then the corporation is treated as only being a
Excluded Members and Additional Members
member of the controlled group of which it is a member
A corporation that is a member of a controlled group on
by satisfying the 80% total value test.
its “testing date” (the date which is used for determining
the status of controlled group members as component
However, if on December 31 a corporation is a member
members or excluded members) is treated as an excluded
of more than one brother-sister controlled group, the
member of the controlled group for the taxable year if
corporation may elect the controlled group in which it is
that corporation is:
to be included by filing a statement with its income tax
return for the taxable year. The election is irrevocable
(A)
and is effective until a change in the stock ownership of
a member of the controlled group for less than half
the year;
the corporation results in termination of membership in
the controlled group in which the corporation has been
(B)
exempt from taxation in that taxable year;
included. If no election is made, the IRS will determine
(C)
taxed as a foreign corporation for the taxable year;
(D)
an insurance company subject to other taxation
the controlled group in which the corporation is to be
included. The determination will be binding for all
rules under the Code;
subsequent years, unless the corporation files a valid
election with respect to any subsequent year, or until a
(E) a franchised corporation.
change in the stock ownership of the corporation results
in termination of membership in the controlled group in
A corporation that is not a member of the controlled
which the corporation has been included.
group on the testing date of any taxable year is treated as
an additional member of a controlled group for the
taxable year if it was a member of the controlled group
for one-half (or more) of the taxable year and it is not
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excluded as a tax exempt corporation, a foreign
Determination Letter – This is a submission of
corporation, insurance company or franchised
information to the IRS that enables the IRS reviewer to
corporation for any of the reasons outlined above.
make and then issue a determination regarding the plan
document. A request for IRS determination letters (using
Controlled Groups and Qualified Plans
either Form 5300, 5307 or 5310) by a sponsor who is a
As we noted earlier, the determination of whether there
member of a controlled group requires the plan sponsor
is a controlled group situation is a critical analysis that
to attach a statement that provides detailed information
impacts the plan (or plans) as a whole. If the sponsor of
on the following:
a tax qualified retirement plan is part of a controlled
group, all employers of the controlled group must be

all members of the controlled group;
treated as a single employer to satisfy the general

the relationship of each member of the controlled
group to the plan sponsor;
qualification requirements of Code § 401 as well as
numerous plan tests, including:

Compensation limitation test under § 401(a)(17);

Minimum participation requirements under
controlled group that includes a foreign entity.
Form 5500 Annual Return/Report (“Form 5500”) Electronically filed with the Department of Labor which
Eligibility requirements under § 401(a)(3) and
reports when the plan’s sponsor is a member of a
§ 410(a);

Minimum coverage rules under § 410(b);

Vesting requirements under § 401(a)(7) and § 411;

Determination of Highly Compensated Employees
whether the plan sponsor is a foreign entity and
whether the plan sponsor is a member of the
§ 401(a)(26) (for defined benefit plans);

retirement plans common to all controlled group

ADP*/ACP nondiscrimination tests under § 401(k)



members; and
and § 401(m);

the type(s) of plan(s) maintained by each employer;
Nondiscrimination rules under § 401(a)(4),
including the general test;


controlled group. Generally, only one Form 5500 is
required for a “single-employer” plan maintained by a
controlled group.
under § 414(q);
Funding Deficiencies - For a defined benefit plan, the
Maximum benefit and contribution limits under
controlled group members may become liable for the
§ 415 (the 80% ownership requirement becomes
funding deficiencies of other controlled group members
more than 50% for this provision); and
whose employees are participants in the plan.
Top-heavy test under § 416.
Controlled Groups for Tax Exempt Entities
*403(b) plan elective deferrals are not subject to the
The IRS issued final regulations in 2007 (effective in the
ADP test.
2009 plan year) that include updated guidance on
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controlled group rules for certain tax exempt entities
same requirements as outlined under the prior section,
sponsoring § 401(a) or § 403(b) plans.
Controlled Groups and Qualified Plans.
Controlled Group Rules for Tax Exempt Entities
Governmental and Church Tax Exempt Entities under
Effective in 2009 - Tax exempt entities under Code §
Code § 3121(w)(3) Remain under the Old Rules – While
501(c)(3) (such as charitable trusts or foundations) that
the final 2007 regulations reserve the right to issue
sponsor § 401(a) or § 403(b) plans are treated as a
additional regulations, they currently specifically
single employer under the controlled group rules. This
exclude governmental entities and churches (meaning a
can apply to multiple § 501(c)(3) organizations that are
church, a convention or association of churches, or an
under common control or to a § 501(c)(3) organization
elementary or secondary school that is controlled,
and a non-§ 501(c) organization that are under common
operated or principally supported by a church or
control. Common control exists between a tax exempt
convention or association of churches) from the new
organization and another organization if at least 80% of
rules. The final regulations explain that these entities can
the directors or trustees of one organization are either
continue to apply a reasonable and good faith
representatives of, or directly or indirectly controlled by,
interpretation of the controlled group rules that were
the other organization (i.e., the other organization has the
outlined in IRS Notice 89-23.
authority to appoint and remove directors or trustees
Notice 89-23 provides that the controlled group includes
which is based on facts and circumstances).
each entity of which at least 80% of the directors,
Permissive aggregation to be treated as a single
trustees or other individual members of the entity’s
employer is available for tax exempt organizations if
governing body are either representatives of, or directly
they maintain a plan covering one or more employees
or indirectly controlled, or are controlled by, the
from each organization and if these organizations
contributing employer. In addition, an entity is included
regularly coordinate their “day-to-day” activities. As an
in the same controlled group as the contributing
example, an entity that provides a type of emergency
employer if such entity provides directly or indirectly at
relief within one geographic location and another exempt
least 80% of the contributing employer’s operating funds
organization that provides that service within another
and there is a degree of common management or
geographic region may treat themselves as under
supervision between the entities. A degree of common
common control if they have a single plan covering
management or supervision exists if the entity providing
employees of both entities and regularly coordinate their
the funds has the power to appoint or nominate officers,
day-to-day exempt activities.
senior management or members of the board of directors
(or other governing board) of the entity receiving the
If a tax exempt sponsor of a § 401(a) plan is part of a
funds. A degree of common management or supervision
controlled group, all employees of the controlled group
also exists if the entity providing the funds is involved in
must be treated as a single employer and must satisfy the
the day-to-day operations of the entity.
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For an educational organization which is part of a
governmental entity, the “employer” includes any other
educational organization that has the power to levy tax
to provide funds to the contributing employer or to set or
review the contributing employer’s budget, and also
includes any educational organization that receives tax
disbursements pursuant to the same tax levy.
Example: If a two year college and a university each
receive 80% or more of their tax disbursements pursuant
to a tax or taxes levied by a state and each of their
budgets is reviewed by an educational organization, then
both educational organizations are treated as one
employer.
Controlled Group Rules Are Complicated
There are more in-depth rules relating to controlled
groups that are not addressed in this white paper. Plan
sponsors should work closely with their attorney and, if
applicable, their actuary to ensure that they are
complying with the rules affecting controlled groups.
You may also want to read our article, Overview of
Affiliated Service Group Rules for Retirement Plans.
MassMutual Regulatory ServicesSM
This document is for informational
purposes only and should not be construed
as legal and/or tax advice. Please consult
with your own legal counsel and other
experienced advisors regarding the
application of the matters described herein
to your specific circumstances.
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